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Long-Term Investors Need Not Worry About Trading Commissions

Feb. 12, 2014 4:59 PM ETby: Dividend Herder

For Long-Term Investors, Worrying about Trading Commissions Is Usually a Waste of Time

Many of the conversations we have here at Seeking Alpha might make us look to the outsider as though we're not humans at all but are instead cold calculating machines who sit around debating the long-term financial implications of even the smallest financial decisions.

Nowhere is this more apparent, in my opinion, than in discussions about the effect of trading commissions on total returns. On the one hand, this makes a certain amount of sense. The money one spends on commissions is, after all, money not invested.

On the other hand, for the long-term investor who is saving for retirement and who trades on a relatively infrequent basis, the effect of commissions seems relatively small on an absolute basis. For example, I pay $6.95 per trade with Sharebuilder. If you take that amount and assume 8% annual price growth over the course of the next 30 years, you end up with $69.94 in today's dollars. That's a mere $28.81 in future dollars (assuming inflation of 3%). If I make one stock purchase a month, then, that's a mere $288.10 dollars per year in future dollars.

It seems almost comical to fret over such a small sum in the face of investment goals that are usually discussed and denominated in terms of hundreds of thousands or even millions of dollars. For those saving for retirement or who are otherwise investing for the long term, in other words, I am of the opinion that spending more than a second or two worrying about how to avoid trading commissions is a waste of time.

There Is Even Less Reason to Worry about Commissions If the Investable Funds Are in Danger of Being Spent Elsewhere

If the average long-term investor does not need to worry too much about commissions' drag on total returns, this is especially true for investors suffering from momentary lapses of discipline. The type of investor I am referring to is illustrated by the following comment to a previous article of mine:

I've come to a point in life where I finally have "extra money", instead of living paycheck to paycheck. I've budgeted $200/month for investing. When I get the $200, I invest it as I've taken the month to research what 1 stock I want to buy. I treat investing as a bill that has to be paid on a monthly basis, else the "extra money" will find some other place to go. I could do better on a commission cost basis if I waited, however I recognize that I am not yet disciplined enough with my money.

What this comment illustrates is that if one needs to invest frequently in order to stay interested in investing regularly, then one should do so even though the commission will necessarily represent a larger hit to one's investment on a percentage basis than might otherwise be the case.

For example, paying a $6.95 commission on an investment of $75 looks at first like a pretty bad idea. Why not wait until one has $1,000 or $5,000 or more so that the commission will represent a smaller percentage of the invested funds? This is a legitimate question to ask of a disciplined investor. But if the alternative is that the person will blow the $75 on beer and pizza, then the answer changes. Of course it is better to pay the $6.95 commission and invest the funds rather than blowing the funds on beer and pizza.

There are plenty of times when I've found myself facing a similar dilemma. Sometimes, I have the discipline to accumulate $500 or $1,000 before investing, but other times I know that the extra $100 I have lying around will be gone by the end of the weekend unless I do something responsible with it immediately. When this happens, the responsible thing to do is to invest the funds before they can be frittered away elsewhere, even if the investment is only a few dollars.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I'm a DIY investor and not a financial professional, broker, or securities dealer. My articles and comments express my own thoughts and opinions and nothing more. You should always seek qualified advice pertaining to your own unique situation before investing your money.

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